This month Popular Science featured Tindie in their article “The Rise of Open Hardware“.
One of their questions was about open hardware business models; it’s question that comes up quite a bit: “How do you make money with open hardware?”
To answer this, I think you must answer another question first: How big of a business do you want to build?
You must be honest with yourself about the opportunity you are pursuing, as well as your goals. Here are the 4 types of companies I’ve seen, and each brings with it particular challenges.
Hobby/ Side Project
At this scale, you can create new designs, get them made by a low-volume manufacturer, and sell them from your garage. Many Tindie products fall under this category. Nothing too complicated at this stage as you’re selling on demand, and up to 1,000 units a year, and handling shipping and fulfillment yourself.
Example: Tindie inventors
Small, Full-time Business
In this category I’d put many of the popular platforms like Teensy or Digispark. Their creators have built great businesses with strong communities. The time commitment ultimately ranges from a few hours a week to going full-time. Full-time is very dependent upon demand, but let’s say around 10,000 units a year. You’re still just manufacturing and selling your design – but at a greater scale (at least 10x of a hobby/side project).
Congrats! You have 10+ employees, and are becoming a well oiled machine. This is the point where you’re wondering “How big can this get?!” The difference between a small, full time business and a mid-sized company is that something else is driving your bottom line, meaning your mechanism for generating revenue is different.
You are no longer a company that just manufacturers and sells hardware. You’re now becoming a platform. For example, look at Adafruit and Sparkfun: Adafruit’s Learning System is fueling their growth. Sparkfun recently released Sparkfun Data for hosting and storing your data. Both are value add services that channel in new customers, as well as sustain their growth moving forward. They are manufacturing and designing new products, but there is a lot more going on under the hood.
Billion dollar Company
Redhat was the first billion dollar with open source software, so it is now a matter of time until the first billion dollar open hardware company emerges. You are working on a problem so big that you require outside funding to seize the opportunity. Institutional investors agree – and have put in millions of dollars, if not tens of millions, into your vision.
This is where things get complicated with open source hardware.
The moment you receive outside investment, your investors will require proprietary (code word for “closed”) assets. True Ventures has been one of the leading investors in open hardware. In looking at their investments, you can see this closed source requirement. Littlebits patented its magnetic connector. Makerbot had filed patents prior to their acquisition. 3D Robotics is rumored to be moving more closed source. With True Ventures as their lead investor, it would follow the pattern seen with True’s previous investments.
The other requirement investors will want is an exit – either an acquisition or IPO. In the best case scenario you IPO, and remain an independent company. With an acquisition, the business acquiring you will be doing so for your assets. As of yet, we haven’t seen an open hardware company acquired for their name/trademark alone. So you’ll need to be comfortable going closed on some aspect of your business – either from the start or down the road. It’s not a question of if, but when.
If you want to build an open hardware company, you should very clearly and realistically define your goals then position your business to match those goals. The vast majority will be small businesses, and open sourcing your design has many benefits from building community to lower development costs. However, the minute you accept outside funding, that will come with it the realization that you will have to have a closed source component.